Apple: Susquehanna Starts at Hold; Larger-Screen iPhone Key

By Tiernan Ray

Shares of Apple (AAPL) closed down $15.01, or 3.4%, at $428.85, pressured by news of some funds dumping the stock, as the Barron’s Focus on Fundsblog reported.

The stock this afternoon got an initiation of coverage from Suquehanna Financial Group’s Chris Caso, who starts the stock at Neutral, with a $480 price target.

Caso, whose coverage beat is mostly about semiconductor and component suppliers, writes, “While AAPL does not suffer from a lack of coverage, we seek to add value to the conversation through our knowledge of AAPL’s supply chain, which we’ve closely followed since the iPhone’s inception.”

Caso opines that the two things the stock needs are “improvement in margins, and a significant product cycle for iPhone, which would unleash an upgrade cycle and reverse recent share losses.”

The rumored “iPhone 5S” is likely only “evolutionary,” and therefore unlikely to help Apple’s mix of iPhone sales get back to the higher-end of its portfolio after several quarters of lower mix with the iPhone 4 and 4S sales, Caso thinks. His “checks” posit the 5S beginning production in June and arriving sometime over the summer:

Our checks continue to point to a low-volume production start for iPhone 5 in June, with a stronger ramp in C3Q. We have confirmed this through several of AAPL’s component suppliers, which have included a small volume of 5S components in their June quarter expectations. We think consensus has now begun to factor in a fall launch, based on speculation of delays and due to Tim Cook’s comments on the earnings call. We think that a summer launch (which if true would likely be confirmed in advance of July earnings) could act as a short-term catalyst if there are no last minute delays.

Caso differs from some analysts who have suggested a lower-priced iPhone will be used by Apple to sell more goods to price-conscious buyers. He thinks such a device is coming, but it is mostly about cutting costs and improving margin:

Our checks suggest a low-cost iPhone to begin production in late July/early August, with more significant volume in September. We believe this production schedule will permit availability to consumers in the early fall. While some believe this phone is intended to allow AAPL to penetrate new markets, we don’t agree. AAPL already offers the iPhone 4 as a value product for lower price points. The problem, however, is that the cost of the 4, 4S, and especially the 5 is too high to sell at lower price points, which has contributed to AAPL’s margin issues. This is especially problematic with the lower end products growing as a percent of AAPL’s total mix. We think the new lower cost phone will help to alleviate these margin pressures, and will eventually replace the legacy phones in AAPL’s lineup. However, given our view with regard to the timing of the low cost phone launch, we don’t expect much positive impact on margins until at least C4Q. We also think the low cost iPhone provides a low cost vehicle to eventually offer on the China Mobile network (the iPhone 4 is not compatible with China Mobile’s network), but based on our estimates for initial production volumes we don’t view a China Mobile launch as imminent.

A larger-screen iPhone is the “most significant” catalyst to look forward to, and he thinks that won’t arrive until the first quarter of next calendar year:

The most significant catalyst that we are waiting for is a larger screen iPhone. Given the success that Samsung has enjoyed in this segment, we think it is obvious that AAPL is failing to address a significant portion of the market that desires a larger screen. Regardless of one’s view of the medium term growth trajectory of the smartphone space, it is obvious to us that a larger screen size iPhone would begin a very significant upgrade cycle among current iPhone users, and likely arrest or reverse the share losses to Samsung – at least in the short term. Our checks in February left us hopeful that we could see such a phone before Christmas, but we no longer think that’s likely until at least 1Q14. In short, this is the catalyst we’re waiting for.

Caso thinks trends for the iPad are not as good as some suspect:

iPad is less material to AAPL earnings, but the trends in this area don’t appear to be in AAPL’s favor. Our C2Q iPad estimates are slightly below consensus at 16 mln versus consensus of 18.3 mln, and we believe the mix shifts slightly in favor of the 10” iPad, which helps margins. We also believe C3Q production is down significantly Q/Q. That reduction in production is likely ahead of new product launches in the fall, but it also suggests downside to consensus iPad expectations in C3Q.

Caso is modeling $170 billion in revenue this fiscal year ending in September, and $38.93 per share in profit, which is below the Street consensus for $171.4 billion and $39.77.

For 2014, he sees $194 billion and $47.30 per share, which is above consensus for $187.7 billion and $44.14 per share.

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There are 4 comments

MAY 15, 2013 5:53 P.M.

Bill wrote:

Samsung sales of larger than 4 inch screen are less than 10% of all their smartphone sold. Analysts have the wrong impression that customers are flocking to large screen phones when they are not. Just go and check it out in the wild and count how many 5 inch screen phone are there. Not many. So, why should Apple make a 5 inch phone for such a small market? Doesn't make sense.

MAY 15, 2013 9:34 P.M.

Joe wrote:

@Bill - What you say is true initially in the market adoption of smartphones. However, as the users get more experienced and sophisticated, they would like to move up the ladder to larger screens and better functionality, customization and control. We know that the smartphone market is maturing and different segments are forming ... low-cost, entry level smartphones, mid-range smartphones, high-end smartphones. The segmentation will also go along the lines of functionality. For example, in city where people commute by mass rapid transit more then driving their own cars, there is ample travel time which some people use to watch movies. Here, a larger screen is a better choice. As the smartphone market matures, the segmentation will gravitate to different categories even more. Recall in the PC market, the gamer's market grew on its own trajectory with more powerful processor, graphic cards, user interfaces, etc. However, for the productivity segment, they are happy with browsing, word processing, spreadsheet and presentation basic functions. The same thing would happen in the Smartphone market. That is why, it is important to serve what the market varying needs and desires at that evolution path and not be stuck with an old dogma of one size fit all. It is becoming clear that Apple has lost that "Vision" thing and of late, even losing the "Execution" capability, not to mention, it has even lost its "Marketing Hype" magic. Now we know what Steve Jobs had brought to the table in the past that was the recipe for Apple's amazing success. How do you bring back all these powerful elements?

MAY 16, 2013 4:20 A.M.

Analyst credibility wrote:

Although Chris Caso of Susquehanna wishes to add value, Look at his ratings on TipRanks - he has only a 30% recommendation success rate, meaning reocmmendations that actually outdid the market, and -9.6% average return over S&P on his recommendations. meaning his recommendations are more than often wrong and lose out. As investors, as much as Caso wishes to add value - it seems to me that TipRanks information adds a lot more value. See if you agree http://www.tipranks.com

MAY 16, 2013 9:46 A.M.

Kevin wrote:

Samsung's ads tell me that Samsung is for young people and Apple is for old people.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.